An REA Model of an Economic Exchange

William E. McCarthy*Michigan State University

*http://www.msu.edu/user/mccarth4/

Cookie-Monster (the customer) and Elmo (the entrepreneur) meet in the (real or virtual) marketplace, thus setting the

stage for an Economic Exchange

EconomicEvent

EconomicAgent

EconomicResource

duality

Source:

W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting Systems in a Shared Data Environment,” The Accounting Review, July 1982, pp 554-78.

W.E. McCarthy “The REA Modeling Approach to Teaching Accounting Information Systems,” Issues in Accounting Education, November 2003, pp. 427-41.

Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in a

SHIPMENT (transfer of Cookie Inventory)

Give

Take

Economic Resource

inside participatio

n

outside participatio

n

outside participatio

n

inside participatio

n

stock-flow

stock-flow

Economic Event

Economic Agent

Economic Agent

Economic Agent

Economic Agent

Economic Resource

duality

Economic Event

REA model of cookie sale from entrepreneur’s (ELMO) perspective

Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in

a PAYMENT (transfer of Cash)

Give

Take

Economic Resource

inside participatio

n

outside participatio

n

outside participatio

n

inside participatio

n

stock-flow

stock-flow

Economic Event

Economic Agent

Economic Agent

Economic Agent

Economic Agent

Economic Resource

duality

Economic Event

REA model of cookie sale from entrepreneur’s (ELMO) perspective

Give

Take

Economic Resource

inside participatio

n

outside participatio

n

outside participatio

n

inside participatio

n

stock-flow

stock-flow

Economic Event

Cash Receipt

Economic Agent

Salesperson

Economic Agent

Customer

Economic Agent

Customer

Economic Agent

Cashier

Cash

Economic Resource

Cookies

duality

Economic Event

Sale

more general exchange model from the entrepreneur’s (ELMO’s) internal perspective

Product#

Description

Price

QOH

P-1 Chocolate Chip

1.05 200

P-2 Chocolate .95 205

P-3 Peanut Butter

1.00 97

P-4 Pecan 1.10 257

Invoice#

Receipt Timestam

p

Amount Applied

I-1 2JUL0830 14.75

I-2 3JUL0800 2.00

I-2 5JUL0800 18.00

I-3 8JUL1145 9.90

I-4 8JUL1145 9.20

Invoice# Dollar Amoun

t

Date

Salesperson

Employee#

Customer #

I-1 14.75 1JUL E-1234 C-987

I-2 20.00 2JUL E-1235 C-888

I-3 9.90 3JUL E-1236 C-999

I-4 9.20 5JUL E-1237 C-999

Product# Invoice# Quantity

P-2 I-1 5

P-3 I-1 10

P-3 I-2 20

P-4 I-3 9

P-1 I-4 4

P-3 I-4 5

COOKIES

SALE

COOKIES-stockflow-SALE

SALE-duality-CASH_RECEIPT

Partial Database for Elmo’s Cookie Business

Why is this invoice amount $14.75 ??How is customer paying for

this ???

A business process is a set of activities that takes one or more kinds of input and creates an output that is of

greater value to the customer (Hammer and Champy)

A value chain is a purposeful network of business processes aimed at assembling the individual components of a final product (i.e., its portfolio of attributes) of value

to the customer (Porter and Geerts/McCarthy)

Part of ELMO’s Value Chain for Providing Cookies

cookie ingredient

s

Acquisition Cycle

cash

business process

labor

cookiesConversion Cycle

business process

Revenue Cycle

cash

business process

value chain

Different perspectives on REA modeling needed for enterprise modeling (value chains) and collaboration space (supply

chains)• Enterprise modeling (as evidenced in normal ERP systems) is

done from the perspective of one company or entrepreneur. Business processes are viewed as components of a single value chain. A single exchange (like the sale of a product for money) would be modeled twice, once in the enterprise system of each trading partner.

• Collaboration space modeling (as evidenced in ebXML or ISO Open-edi) is done from a perspective independent of each trading partner. A single exchange is modeled once in independent terms that can be then mapped into internal enterprise system components. Supply chains are networks of business processes that alternate internal transformations and external exchanges (definition due to Bob Haugen).

• REA modeling works in both cases and the independent to trading partner mapping is absolutely straightforward and completely defined.

BusinessProcess

BusinessProcess

BusinessProcess

BusinessProcess

BusinessProcess

BusinessProcess

Independent view of Inter-enterprise events

Enterprise

Enterprise

Enterprise

BusinessProcess

BusinessProcess

BusinessProcess

Illustration of Perspective: Trading Partner vs. Independent

Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers)

Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies

SOURCE: Adapted from ISO 15944-4, K. Morita

Used for collaboration space modeling

initiating transfer

Economic Resource

participatio

n

participatio

n

participatio

n

participatio

n

stock-flow

stock-flow

Economic Event

Economic Agent

Economic Agent

Economic Agent

Economic Agent

Economic Resource

duality

Economic Event

REA model of cookie sale from independent (collaboration space) perspective

responding transfer

Cookie-Monster and Elmo after their economic exchange (both economic

agents have now reached higher levels of utility)

Cookie Monster and Elmo are of course characters from the Public Broadcasting Service TV show Sesame Street*. Their use here is only illustrative. Cookie Monster is a great example of a typical buyer (has money, wants goods) because he is most happy when he has a cookie to eat. The use of Elmo as a typical seller (has goods, wants money) is only a convenient illustration. The Cookie Monster shown was a favorite toy of my daughter Meghan. The Elmo was bought for me by my wife Jane.

* see http://www.sesameworkshop.org